More trouble for India's crypto exchanges as new TDS rules causes drop in trading volume

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The TDS rule states that all trades involving the sale and transfer of crypto assets will be charged a 1 percent fee on the seller's end. This means that the seller will receive 1 percent lesser than the total proceeds of the sale. Also, since transaction fees are a major source of income for crypto exchanges, the drop in trading volume only adds to the woes of Indian crypto exchanges.

"The TDS levy is a modern instance of a tax provision that would be highly detrimental to the crypto industry. The tax provision will not only discourage innovators who have been doing a great job in promoting India as an innovative hub for the industry, but the government too will be at a loss as they will lose out on the possibility to earn massive tax revenue due to the overall decreased transaction volumes," said Amanjot Malhotra, country head at Bitay, to BusinessLine.

However, a few experts believe it is too early to ascertain the full effect of the new TDS rules as trading volumes generally slump over the weekend. "At present, it is still premature to predict the ramifications of TDS. We will be in a better position to understand this by the second week of July," said Rajagopal Menon, vice president at WazirX, to The Economic Times.

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On the other hand, some experts view the TDS rule as a positive for crypto businesses. "Investors can trade now with confidence by paying applicable taxes and crypto entrepreneurs in India can conduct their business without any fear," said Shivam Thakral, CEO of crypto exchange BuyUcoin, to the Hindu BusinessLine.

Indian exchanges had shown a similar reaction when a 30 percent tax on profitable crypto trades was introduced on April 1, 2022. Over the next 4 days, Indian exchanges lost 44 percent of their trading volume.

According to crypto market researcher Crebaco Global, trades on WazirX dropped by 40 percent, CoinDCX slipped by 52.91 percent, and Zebpay cliff-dropped 76 percent, since March 31, 2022 (before the 30 percent tax was enforced.)

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The TDS rule has also further decelerated Rupee deposits on crypto exchanges. The same was already slowing down since the tussle between Coinbase and the National Payments Corporation of India (NPCI), resulting in the exchange halting its UPI services in India.

This happened back in May 2022, when Coinbase rolled out its UPI service. The very next day, the NPCI issued a statement saying it was unaware of any crypto exchange using UPI in the country. Following this statement, all crypto exchanges in the country began to pull the plug on UPI payments.

The crypto industry has also been impacted by the everlasting Crypto Winter that began at the end of December 2021. As a result, several Indian crypto exchanges have reduced their hiring initiatives to keep operating costs to a minimum.

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"We have cut down all our non-critical costs," said Menon to the Economic Times earlier in June. “We are hiring only critical hires, we aren’t spending money at all. It’s literally crypto winter here,” he went on to explain. It's a similar story for Unocoin and BuyUcoin who have slowed down hiring. The latter has also cut down on paid partnerships with social media influences and reduced mass advertising campaigns.